The internet, electronic commerce, and information technology (IT) have had a dramatic impact on the development of Houston-based Enron Corp. and on the energy industry in general, contends Enron Chairman Ken Lay.
He said these developing technologies would continue to play a vital role in the company's success in the coming years as well as for that of the energy industry.
Speaking at an e-commerce seminar in Houston sponsored by the Interstate Natural Gas Association of America Foundation earlier this month, Lay said that when Enron was formed in 1985, the company's pipeline group represented more than 80% of its income, with the remaining 20% representing exploration and production, gas, liquids, and other energy-related businesses. Now about 80% of Enron's income is generated from businesses that are new ventures for the company, he said.
Drivers
One of the primary drivers behind this rapid development, he noted, is the need for companies such as Enron to reduce information transaction costs and the speed at which they are conducted.
"Indeed, one reason that companies are becoming vertically integrated-and certainly the oil majors would be the shining example of this-is because information transaction costs are so high. It was a lot cheaper to get all of those activities under one organization where, in fact, they could share everything internally and not have to worry about dealing with external sources," he said.
The internet-and IT in general-has turned this movement "on its ear" and has helped to drive information transaction costs to "virtually zero."
He said, "These developing technologies are changing both the way we do business and the way we organize our various companies."
Increased adoptability
Also increasing is the rate at which these technologies are being introduced into the world economy.
A common measure is how quickly 50 million customers adopt a new technology, Lay said: "If you go back to the radio, it took 38 years to get those 50 million customers.
"If you go to television, it took 13 years; if you go to cable, 10 years; if you go to the internet, 5 years."
When looking at the growth rate of the internet, as recently as 1995, there were 14 million people worldwide using the world wide web, 10 million of those in the US, he said. "By last year, that total number had grown to 338 million, about 123 million in the US. By 2004, we expect to have about 725 million on the internet; over 200 million of those will be in the US.
"So not only did we hit that 50 million adoption rate very quickly, but, if anything, that rate of adoption is continuing to accelerate, and, of course, it is becoming enormous." This happens quite often with network-type businesses, Lay explained. "The more people on the network, the more valuable the network becomes, and the more invaluable it becomes to be on the network."
When considering the adoption rate and popularity of e-commerce, Lay noted that, last year, about $650 billion of business was conducted using the internet-more than $500 billion of that in the US. By 2004, he predicted, more than $6.5 trillion of transactions are expected to be conducted over the internet, with half of that in the US.
While driving down information transaction costs, this increase in the adoption rate also has dramatically accelerated transaction times, Lay said.
It took 2-3 years to negotiate a long-term contract in the early 1980s and, by the early 1990s, the timeframe was reduced to a few months. Using the internet, however, the time to negotiate a contract has been whittled down to less than 1 sec, Lay said. "You know whom you're dealing with, you know what the terms are, you know what the credit arrangement is, and it's done," he said.
Changing models
The internet, e-commerce, and IT developments are, in turn, driving the changeover from the traditional, asset-based business model to the virtual integration business model, Lay noted.
Using US automakers as an analogy, Lay noted that General Motors Corp. and Ford Motor Co. at one time wanted to own and make everything that was needed to build their cars-from timber and iron ore to the radios installed in the vehicles.
"Then along came a company with the name of Toyota, which had quite a different model." Lay said. The model was to outsource the highest-quality, lowest-cost product around the world, which would then be assembled and sold worldwide. In the 1980s, Lay noted, such a business model virtually eclipsed the US automakers.
"Of course, today, US automakers have gone back to the outsourcing of pretty much everything they could outsource, because they realized that they could not be the lowest-cost, highest-quality producer of everything," Lay said.
A company that took this business model one step further was Dell Computer Corp. The computers that Dell builds are, in most instances, already sold and maybe even paid for before even being assembled, Lay noted. "This is the virtual integration model. We at Enron believe that this is where most industries, including our industry, are headed.
"Our e-commerce strategy can basically be defined as 'making new markets.' Our basic competency is providing reliable delivery of commodities of all types at predictable and lower prices," Lay said.
Enron is finding that many other industries outside of energy still cling to the old methodologies, with very inefficient marketing and delivery systems. "They are not able to keep up with competitors using the new model," he said.
The internet-and IT in general-has helped to drive information transaction costs to virtually zero. These developing technologies are changing both the way we do business and the way we organize our various companies.
